Monday, April 02, 2007

Supply-Side Sweepstakes

Early reports from the tax-cutting Club for Growth meeting in Florida give high marks to Rudy Giuliani, Mitt Romney and Newt Gingrich in the Republican presidential supply-side sweepstakes.

I guess John McCain didn’t do as well as he’d hoped, since he was in Baghdad and not in Palm Beach. (Baghdad is obviously very important—hopefully Senator Backbone will eventually come up with a tax-cutting plan of his own.)

One source at the CFG meeting tells me that former House Majority Leader Dick Armey gave the best speech of the conference emphasizing economic freedom.

My friend “Jimmy P” from U.S. News & World Report wonders whether the era of tax cuts is over largely because of new pay-as-you-go budget rules formulated by a Democratic Congress obviously opposed to President Bush’s tax cuts.

Let’s pause for just a moment on this: As a supply-sider and “Laffer Curve” devotee, I would argue that the best way to raise revenues to balance the budget is to reduce marginal tax rates. As Alan Reynolds has shown, the tax share of GDP actually increased during the supply-side tax cuts of John F. Kennedy, Ronald Reagan, and George W. Bush.

Tax revenues have been surging from personal incomes, capital gains, and dividends. Now, the Congressional Budget Office would try to argue that these revenues are lower than would have been the case if taxes had not been cut. But who’s to say? Economic growth would’ve been slower and hence revenues without tax cuts might have been lower. All we know is what we know—namely, revenues have been steadily rising in the aftermath of lower tax rates.

This view is at odds with Washington’s official scorekeepers. But Republican presidential candidates should be out making this point. Rudy Giuliani hinted at this in my CNBC interview. Mitt Romney is close to it.

But if the Bush tax cuts are to be extended, or if corporate tax rates are lowered, or if flat tax reform is proposed, then the dynamic scoring of supply-side tax rate relief becomes an important intellectual and political talking point.